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Cyberattack on LivingSocial daily deals site thwarts profit

By Steven Overly and Thomas Heath, The Washington Post

Posted:
07/26/2013 10:57:29 AM EDT

Member Must-Haves -- A Look at What's Hot on LivingSocial. (PRNewsFoto/LivingSocial)

LivingSocial said Thursday that a massive cyberattack in April that compromised the passwords of more than 50 million customers caused a significant revenue drop in the second quarter and derailed its efforts to reach profitability.

Hackers accessed the names, e-mail addresses, birth dates — and even encrypted passwords — of LivingSocial's customers in the attacks. Afterward, many customers did not reset their passwords and have not returned to the site, said LivingSocial Chief Financial Officer John Bax. The company had been profitable by some measurements for several months this year, but that stopped around the time of the attack, he said.

"We took a hit in April and we took a hit in May, no question about that," Bax said. "We forced any recurring customers to reset their passwords. We are seeing customers return. It takes time. There were some customers who didn't reset their passwords and haven't returned. "

That contributed to LivingSocial's falling short of a critical goal set by chief executive Tim O'Shaughnessy to be profitable by this spring, Bax acknowledged. The company continued to lose money during the quarter — though at a slower rate than before, he said.

LivingSocial cut its losses from $44 million in the first quarter to $37 million in the second, Bax said. Despite the losses, Bax said he liked how the company is doing.

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If there is good news in the losses, it is that the company is burning cash at a slower rate than it had in the past — about $20 million so far this year. That may provide breathing room as the daily-deals giant seeks profitability.

This latest news has left the once high-flying LivingSocial at a critical juncture. The company has lost several top employees, including co-founder and chief technology officer Aaron Batalion, who left in April — one year after another LivingSocial co-founder, President Eddie Frederick, resigned from the board.

Its deals business, which makes up the majority of the Washington-based company's revenue, has come under increased pressure as the daily-deals craze has lost popularity with consumers and merchants.

The company's attempts to move into new business areas have largely fizzled. It began offering marketing services to retailers, hiring Dickson Chu, a managing director from Citi, to run the new division. But Chu was fired after less than a year.

LivingSocial also shuttered Room Service, a white-glove food-delivery service for higher-end establishments. The latest to fizzle out is the company's local adventures business, which took customers on rafting trips or camping excursions organized by LivingSocial's staff members. The division was closed last week, resulting in the layoff of 30 full-time employees.

"Any sense that LivingSocial or Groupon or other daily-deal companies would have the Midas touch and easily extend their success in daily deals to other segments probably has dissipated by now," said Peter Krasilovsky, an analyst at BIA/Kelsey.

Some of the company's investors have deep pockets, including Steve Case, JPMorgan Chase, T. Rowe Price and Amazon. It has raised more than $900 million since it was founded in 2007, including $110 million this year.

The company, which employs 4,000 worldwide, including 2,000 in the United States, is still trying to lower costs.

LivingSocial recently closed sales offices in New York, where the real estate is expensive and where employees personally visit merchants to solicit deals. Instead, employees there and in Seattle work from home.

LivingSocial has already pulled out of some international markets where its daily-deals outposts were flatlining. The company laid off 400 employees, including 160 in Washington, late last year because of a decline in the daily-deals business.

LivingSocial will probably emerge as a smaller firm that it was last year, industry analysts and sources close to the company say. Although there still are opportunities for a sustainable business, the potential for a large-scale, multibillion-dollar business have receded, they said.

"It looks like they're retrenching in a lot of areas, and they can't be as big as they once anticipated being, which is a major player in local and national commerce," said Krasilovsky of BIA/Kelsey.

O'Shaughnessy is the son-in-law of Donald Graham, the chairman and chief executive of The Washington Post Co.